October 5, 2010

Mike Guzy, who currently writes for the St. Louis Beacon and formerly wrote for the Post-Dispatch, is a very talented writer. A column he wrote probably 10 years ago for the Post defending the use of the death penalty remains one of the best treatments of that topic I’ve ever read. But today in the Beacon, he gets his economics wrong. How wrong? Let’s just say it took only a few seconds of research to find two economists who are frequently at odds with each other both disagreeing with his point.

What is his point? That cheap imports are causing unemployment in our current recession, and the proper solution is to raise tariffs on imported goods. From his article:

The only conceivable way to revitalize the American middle class — the little engine of consumption that pulls the global economy — is to impose labor tariffs on imported goods, making their cost comparable to those manufactured here.

This lack of concern resembles many Americans’ disregard for the effects of the Smoot-Hawley Tariff Act, signed into law by Hoover in June 1930. Republicans told themselves that the tariff couldn’t hurt much since trade was a small part of the U.S. economy at that point.

But that view overlooked the signal that markets were sending. Long ago Jude Wanniski noticed that the progress of the Smoot-Hawley legislation tracked declines in the stock market. More recently Scott Sumner, a professor of economics at Bentley University in Waltham, Massachusetts, has argued that the tariff reduced investment all over the world, and therefore produced deflation.

Shlaes’ great book, The Forgotten Man, goes into much more detail about the harm of the tariff.

Just to be clear, I don’t think the Smoot-Hawley tariff was a good thing — it was a really bad thing. Nasty protectionism! Bad Smoot-Hawley! Bad! Bad! Bad!

Krugman is clear that although he doesn’t think protectionism and the tariff caused the Great Depression, it was nonetheless a terrible idea.

When legislation makes the goods that we import, and voluntarily choose to purchase, more expensive, it limits our choices and our freedoms, and increases our costs of living. It also immediately harms the enormous number of Americans who depend on trade, shipping, and related industries for their employment, and results in retaliation by other trading partners that would limit our exports. Instituting higher tariffs for protectionist purposes is always a net loss for our economy.

I think you’re arguing a different point than Guzy. He favors protectionism because he thinks it will help the middle class and then makes the argument that a healthy middle class will lead to wider economic growth. He doesn’t say that protectionism is the best direct path to economic expansion.

Growth doesn’t necessarily mean a big middle class- just look to the BRIC countries to see this. The middle class is the product and design of a very un-free market filled with housing, transportation, communications, farming, and countless other subsidies not to mention government work programs and import tariffs and quotas. In fact it never really existed until governments got involved in creating these kinds of policies and programs.

Guzy is arguing for protecting the middle class first and growing economic output second. You’re arguing for growing economic output. I think he would admit that using your model some amount of growth would be forgone in order to protect the middle class and then argue that this is an acceptable trade-off.

I think we are arguing exactly the same point. He (Guzy) supports a protective tariff because he erroneously believes it will help the American middle-class. I am opposed to a protective tariff because I believe (correctly) that it will hurt almost everyone and make our overall economic situation worse. It is not just economic growth that would be foregone as part of an acceptable trade-off. Our freedom to have the ability to purchase goods we desire would be limited as well, and that is not an acceptable trade-off at all.

“In fact, it (the traditional American middle class) never really existed until governments got involved…”
That is just completely false, and a common falsehood at that. I remember working the polls in a special election a few years ago. I was volunteering for my candidate, and the opponent himself was working the same poll as I was. The opponent was a union man (you can probably guess which party), and I distinctly recall one of his supporters coming up to him and talking about all the benefits unions have given us (and I am perfectly willing to admit unions have done many good things for their members). Then they said almost the same thing you just did, “Unions invented the middle class.”

The only problem with the statement is that it’s totally wrong. There has always been a strong middle class in America. Before the 20th century, the middle class was the vast number of small-town residents and farmers. Those people had a quality of life that was the envy of the world, as hard as parts of it may appear to us in 2010. Most of those people lived very “unsubsidized” lives. Sure, for those who went West there were subsidies of railroads and postal services (rural free delivery), or “subsidized” protection from Indians by the Army. The land on the frontier was NOT subsidized – it was cheap because it was plentiful.

Unions played a positive role in improving the lives of their members as America industrialized dramatically in the late-19th and early-20th century. But, the government and unions did not magically invent the middle class through public policy changes. The typical American in 1900 was not a steelworker in Pittsburgh being victimized by the plutocrats. He or she lived in a small town in upstate New York or Ohio or on a farm in Illinois, lived a life that was every bit as “middle class” as anything since, and did it with a lot less government involvement in their lives than we have now.

Guzy says this: “Our present economic woes are not the result of a temporary recession in the business cycle. Rather, they are the by-products of a fundamental readjustment to a decidedly changed reality.” And then he cites the fact that 70% of the economy is consumer consumption (if you take out housing and food at home it is something closer to like 50% which is still far larger than what it was in the early 20th century) and American workers’ uncompetitiveness in the global market for labor in asking how the economy can recover if people don’t have incomes to spend on a significant part of it.

You said that tariffs impede freedom of choice and cite what people have said about a policy from 75 years ago. Guzy’s whole point is that it is not 75 years ago anymore. How “free” are people to choose things they simply do not have the resources for? You could say that the market would provide things that they could afford, but at lower costs and prices how would the missing chunk of that 50%-70% be made up? His argument is not about how things ought to be but about how things are.

And you just did the same thing to me with your argument against unions. I never said anything about unions but you went there because it is an easy argument to make. I do think that unions put upward pressure on all working class wages but no one in their right mind would argue that they were responsible for the middle class. Income is just one part of wealth. If I’m wrong about the government’s role, address the government’s role.

You are really playing with semantics when you call 1900s rural farmers and homesteaders “middle class.” Clearly this is not the same as today’s middle class. Poverty, affluence, and middle-ness are relative concepts and the definitions change with the standard of living. Of course there is always a statistical “middle” but what makes our “middle class” important is the size of that middle section and its collective economic and political influence. The 19th century “middle” you refer to were not nearly so large in numbers as you suggest and if they were envied it was because they were free from the legacy of feudalism that restricted upward mobility in Europe.

All that being said, tariffs are a bad idea precisely because it is not 75 years ago anymore. Imported goods no longer come from foreign companies who have little to do with America. If the companies that import foreign-made goods aren’t American, they’re publicly traded or internationally-owned and the possibility of the cost of goods to be sold in the world’s biggest consumer market going up could really wreck things for everyone. Then again, as Krugman stated later in the article you linked, unemployment likely played a significant role in extending the depression. So who the hell knows

Just because time has passed does not mean the laws of economics have changed. Guzy is calling for raising a tariff while we are fighting a major recession. We already raised a tariff during a depression and it was a disaster. The parallels play out just fine, time difference or not. Also, central to his statement is a belief that our manufacturing industry would suddenly be revived by a protective tariff. I think that belief is totally irrational and without any evidence to support it.

I did add unions to the mix, perhaps improperly. But it is not semantics at all to say that American society has had a thriving middle class since almost the beginning of the country. It is a different style of “middle class” than the middle class of the baby boom and suburbia, or the middle class of good industrial jobs in company towns or big cities. But its still middle class, and I don’t just mean a logical “middle”. The farmers and small townspeople of 19th century and early 20th century America were a dominant force in our country.

While we may think of sharecroppers and migrants from movies, most of those townspeople and farmers lived lives with a very comparable quality to the middle class of our more recent assumptions. Your statement, “if they were envied it was because they were free from the legacy of feudalism that restricted upward mobility in Europe,” is correct if you apply it to the poor of the 19th century, not the middle class. (Slaves being a large exception, of course.)